principles of managerial finance 14th ed, question p9-1

Basic variables North South Cost $6 million $5 million Life 15 years 15 years Expected return 8% 15% Least-cost financing Source Debt Equity Cost (after-tax) 7% 16% Decision Action Invest Dont invest Reason 8% . 7% cost 15% , 16% cost

a. An analyst evaluting the North facility expects that the project will be financed by debt that costs the firm 7%. What recommendation do you think this analyst will make regarding the investment opportunity? b. Another analyst assigned to study the South facility believes that funding for that project will come from the firms retained earnings at a cost of 16%. What recommendation do you expect this analyst to make regarding the investment? c. Explain why the decisions in parts a and b may not be in the best interests of the firms investors. d. If the firm maintains a capital structure containing 40% debt and 60% equity, find its weighted average cost using the data in the table. e. If both analysts had used the weighted average cost calculated in part d, what recommendations would they have made regarding the North and South facilities? f. Compare and contrast the analysts initial recommendations with your findings in part e. Which decision method seems more appropriate? Explain why.